The Rating Outlook for the special obligation revenue bonds, capital improvement and refunding bonds, and the implied unlimited general obligation rating is Stable.

The Rating Outlook for the gas tax revenue bonds is negative.

SECURITY

Special Obligation Bonds: The city has covenanted and agrees to appropriate in its annual budget legally available non-ad valorem revenues in an amount sufficient to pay debt service on the special obligation revenue bonds. The obligation shall be cumulative to the extent not paid. Such covenant to budget and appropriate non-ad valorem revenue is subject to the availability of non-ad valorem revenues after satisfying obligations with a specific lien on such revenue and the funding of essential government services.

Capital Improvement Bonds: The capital improvement revenue bonds are secured by a pledge of the city's share of the local government one-half-cent sales tax.

Gas Tax Bonds: The gas tax revenue bonds are secured by a lien on the revenues from the 5- and 6-cent local option gas tax imposed by the county and received by the city pursuant to state law and interlocal agreement. The county ordinances authorizing collection of the gas tax revenues do not extend to the scheduled final maturity date of the bonds; therefore, the city has a covenant to budget and appropriate legally available non-ad valorem revenues only in the event the city's receipt of gas tax revenues terminates as a result of the county's determination not to extend the levy of either of the local option gas taxes.

RECENT ECONOMIC IMPROVEMENT: The city's taxable assessed value (TAV) declined by a steep 59% from fiscal year 2008 to fiscal year 2012, but has recently returned to growth. City employment trends have been positive and unemployment has been declining. Per capita income levels are below average.

SOUND SPECIAL OBLIGATION BOND DEBT SERVICE COVERAGE: The rating on the special obligation revenue bonds is based on the city's covenant to budget and appropriate (CB&A) non-ad valorem (NAV) revenues to pay debt service. NAV revenues comprise a broad base of resources from which to pay debt service, and coverage remains sound.

MODERATE DEBT LEVELS; CARRYING COSTS ARE HIGH: City debt levels are moderate, with average amortization and modest planned near-term debt issuance. Combined debt service, pension, and other post-employment (OPEB) costs are elevated due to high pension costs. The city has implemented reform measures to control spending pressure from retirement system related needs.

COVENANT DEBT NOTCHING: A one-notch distinction between the special obligation bond rating and the implied ULTGO rating reflects the absence of a pledge of specific revenue and the inability to compel the city to raise non-ad valorem revenue sufficient to pay debt service.

RATING SENSITIVITIES

The gas tax revenue bond ratings are sensitive to shifts in debt service coverage driven by economic trends affecting revenues supporting the debt. Stability or improvement in pledged revenue coverage could result in a revised Outlook on the rating of those bonds.

The special obligation, capital improvement, and implied ULTGO ratings are sensitive to shifts in fundamental credit characteristics including the city's financial management practices. The city's history of maintaining solid reserves and debt service coverage levels while addressing operating and capital needs indicates continued rating stability. However, continued reliance on reserve draw-downs for budget balance to below policy levels could pressure the ratings.

CREDIT PROFILE

Cape Coral is located on the southwest coast of Florida in Lee County 10 miles south of Fort Myers and 125 miles south of Tampa. The city enjoys over 400 miles of waterways providing access to the Intercoastal Waterway and Gulf of Mexico making it a popular vacation and retiree community. Population in 2012 totalled 161,248.

SOUND RESERVES DESPITE DRAW-DOWNS

Fiscal 2012 ended with an unrestricted general fund balance of $28.3 million or 23.9% of spending, down from $34.4 million or 29.5% in fiscal 2011. Current estimates for fiscal 2013 show a moderate $2.4 million deficit. This would decrease the total fund balance to about $27 million or 23% of spending, with the unrestricted balance close to that figure. The fiscal 2013 budget includes about $1.8 million in capital spending on various items. The city has indicated that the fiscal 2013 estimate does not take into account certain year-end accruals that would bring the deficit down to closer to $1 million.

The budget for fiscal 2014 assumes a deficit of $5.7 million, which would reduce the estimated general fund balance to $21.8 million or about 17% of spending, meeting the city's fund balance policy minimum. However, this may be conservative given expected fiscal 2013 performance. The fiscal 2014 budget includes $4.2 million in capital spending on road paving. Final figures for fiscal 2014 will depend on court validation of the new fire service assessment, which would add $12 million to the budget.

CITY EXPANDS REVENUE BASE

The city has been examining options to diversify its revenue base away from a dependence on property tax revenues and better provide for capital needs. Two new revenue sources have recently been approved: a public service tax (PST) on electric services and a fire services assessment. The new public service tax was effective Oct. 1, 2013 and is expected to yield $7.6 million in new revenue for fiscal 2014.

The fire assessment was approved by the city council, but implementation has been held back pending the outcome of a court validation review of the proposed method of assessment. This method differs from court-tested assessment methods used by other Florida municipalities. A court finding is expected by the end of the month. If validated at that time, the city will start billing the assessment in December. Projected assessment revenue for fiscal 2014 of $12 million is not currently reflected in budget. The projection for fiscal 2015 assessment revenue is $19 million. If the city receives an adverse court ruling, it is Fitch's understanding that the city would have the option of implementing the assessment under the tested methodology, at a level generating equivalent revenues to current projections.

HISTORICAL TAX BASE DECLINES; RECENT SIGNS OF RECOVERY

Cape Coral was among the communities hardest hit by the housing downturn and recession. TAV dropped by more than $12 billion or about 59% from fiscal 2008 to fiscal 2012. Ad valorem taxes, which represent approximately 63% of fiscal 2012 general fund revenues, were $66.3 million or about one-third less than in fiscal 2008. After successive years of decline, TAV returned to growth in fiscal 2013. TAV grew by 3.9% in fiscal 2013, with additional growth of 6.9% expected for fiscal 2014.

Employment trends have also been positive during the recovery, with annual job growth and declining unemployment rates. The city's August 2013 unemployment rate of 6.8% is down from 9.1% a year prior, and is below state (7.1%) and national (7.3%) levels. Aside from the city and the Lee County school district, the top 10 employers include retail establishments, a real estate firm, a hospital facility, a credit card processing company and a senior residential housing complex.

MODERATE DEBT LEVELS; CARRYING COSTS ARE HIGH

City overall debt levels are moderate ($2,363 per capita and 3.3% of market value for fiscal 2012) and debt service as a percentage of governmental spending is midrange at about 10.6%. Principal amortization, about 43% repaid within 10 years, is in the average range. Near-term debt plans are modest, including potential issuance of $1.5 million in debt backed by fire assessment revenues and about $11 million in capital lease financing in fiscals 2015 and 2016. The amount and scheduling of such financing will be re-evaluated should the fire assessment not be validated.

The city maintains three defined benefit single-employer pension plans, including a general plan for non-public safety employees and separate plans for police and fire fighters. Pension funded levels are low at 59.1%, 67.7%, and 61.3% for the general, police, and firefighter plans, respectively, or an estimated 54.6%, 60.9%, and 55.3%, using Fitch's more conservative 7% discount rate

Fiscal 2012 pension costs ran high at about 17.7% of governmental operational spending, although about 20% of pension costs are attributable to the city's enterprise funds. Even excluding these, pension contributions for general government employees are high at about 14% of spending. Total carrying costs, including debt service, OPEB payments and required pension payments, as a percentage of governmental spending are high at 31.4%, or 26.7%, respectively, reflecting only governmental employee OPEB and pension costs.

The city has implemented reform measures to control pension related costs. Revisions to general employee and police labor contracts were negotiated in fiscal 2013 increased retirement age and length of service for new employees, but also reduced certain benefits for all employees. These reforms are expected to yield savings of $125 million over the next 25 years, although savings for fiscal 2014 are estimated at only $2 million. Negotiations continue with the firefighter's union to implement similar changes.

SOUND SPECIAL OBLIGATION AND CAPITAL IMPROVEMENT BOND DEBT SERVICE COVERAGE

Non-ad valorem revenues are sizeable in absolute terms and diverse, estimated at about $64.9 million in fiscal 2013. Gross MADS on all special obligation bonds is $19.9 million. Fiscal 2012 net coverage of MADS, after deducting essential expenditures and excluding federal interest subsidies was 2.2x and is estimated at 2.3x for fiscal 2013.

The city's ability to leverage its non-ad valorem revenues is limited by an anti-dilution test which requires that the city's non-ad valorem revenues for the prior two fiscal periods shall not be less than 1.5x projected MADS, and projected MADS shall not equal more than 20% of governmental fund revenues. The use of NAV revenues to support city operations also protects against substantial additional issuance of CB&A obligations.

Coverage remains strong for the capital improvement revenue bonds at 2.5x MADS from fiscal 2012 pledged revenues. Pledged sales tax revenues in fiscal 2012 were flat, following growth of 4.2% in fiscal 2011. Strong growth of 7.6% is estimated for fiscal 2013 leading to improved MADS coverage of 2.7x. The additional bonds test is lenient, requiring only 1.25x coverage of MADS by pledged revenue in any 12 consecutive months out of the immediately preceding 18 months.

WEAK COVERAGE OF GAS TAX BOND DEBT SERVICE

Gas tax collections have experienced multi-year declines that have reduced coverage levels. Gas tax revenues declined 3.6% in fiscal 2012. Coverage of gas tax bond debt service is much tighter than for the city's other debt, at 1.16x from fiscal 2012 pledged revenues, or 1.35x including the federal subsidy for series 2010 bonds issued as BABs. After successive prior year declines, estimates for fiscal 2013 gas tax revenues show a return to growth (6.7%) reflecting general economic improvement. Estimated fiscal 2013 revenues provide net coverage (less federal subsidy) of about of 1.24x, or 1.43x including the federal subsidy, which has been reduced modestly in fiscals 2013 and 2014 due to sequestration. Additional bonds may be issued if gas tax revenues from the prior fiscal year equal only 1.25x projected MADS.